Gentherm Inc (THRM) 2018 Q4 法說會逐字稿

Greetings, and welcome to Gentherm's Fourth Quarter and Full Year 2018 Earnings Conference Call.

(Operator Instructions)

As a reminder, this conference is being recorded.

I would now like to turn the conference over to your host, Yijing Brentano, Investor Relations and Corporate Communications. Thank you; you may begin.

Thank you, Sherry, and good morning, everyone. Thank you for joining us today.

Gentherm's earnings results were released earlier this morning and a copy of this release is available at gentherm.com. Additionally, a webcast replay of today's call will be available later today on the Investor Relations section of Gentherm's website.

During this call, we may make forward-looking statements within the meaning of federal security laws. Statements reflect our current views with respect to future events and financial performance. We undertake no obligation to update them, and actual results may differ materially. Please see Gentherm's SEC filings, including the latest 10-K and subsequent reports, for discussions of various risk factors and uncertainties underlying such forward-looking statements.

During the call, we may discuss non-GAAP financial measures as defined by SEC Regulation G. Reconciliations of these non-GAAP financial measures to the comparable GAAP financial measures are included in our earnings release.

On the call with me today are Phil Eyler, President and Chief Executive Officer; and Matteo Anversa, Chief Financial Officer. Please note that during their comments, Phil and Matteo will be referring to a presentation deck that we have made available on our website at gentherm.com/events. After their prepared remarks, we will be pleased to take your questions.

Now I'd like to turn the call over to Phil.

Thank you, Yijing. Good morning, everyone, and thank you for joining us today.

2018 was a transformative year for Gentherm. While headwinds across the automotive industry presented some challenges, I'm pleased that we were able to deliver record revenue and automotive award levels for full-year 2018. In addition, our Fit-for-Growth cost reduction initiatives began to generate positive impact. While we've demonstrated initial progress in 2018, there are certainly opportunities for further improvement in 2019.

Before Matteo gets into the details of our financial results, let me step back and look at all that we've accomplished in 2018, as shown on Slide 4. It's been just over a year since I joined Gentherm, and we've driven significant change over that time. Let me spend a few minutes talking about how we've repositioned the company and some of our achievements over the past year.

We've restructured the organization around the One Gentherm concept of a global business. To lead the organization going forward, we're leveraging the strong internal executives with years of successful experience at Gentherm and we've augmented the team with proven external talent from industry-leading companies such as GE, Sprint, Pepsi, BD Medical, Fiat Chrysler and Panasonic in functions such as finance, medical, battery thermal management, technology and human resources. This has resulted in what I believe to be a truly world-class team, and I think it speaks to the optimism about our company going forward.

We completed a strategic assessment in just under 6 months, which resulted in a breakthrough transformation strategy that we shared with you back in June. That assessment has resulted in several things. We clarified the company's mission. We identified a plan to divest and minimize noncore businesses. We created a focused growth strategy around Automotive and Medical verticals, which involves 4 key pillars - one, accelerating our climate and comfort business; two, developing an innovative microclimate system, which we call ClimateSense; three, creating unique battery thermal management solutions; and four, expanding our patient thermal solutions in Medical, all of which are enabled by electronics and software expertise. We've seen good early progress, as evidenced by record automotive awards of $1.6 billion in 2018, and the recent divestiture of the CSZ industrial chambers business.

We developed our Fit-for-Growth program to expand margins with an initial focus on operating expenses. We've identified $65 million of annualized cost savings, with $37 million of that already implemented. We're now turning our attention to gross margin, where 70% of our cost structure lies.

Driving cultural change has been a key factor in our early success. We have created an environment centered on customer focus, a global mindset, employee engagement, as well as performance and accountability. We've also realigned compensation to be consistent with driving our focused growth strategy. As I mentioned earlier, we're turning our focus to gross margin expansion, and that will come from improved manufacturing efficiencies, footprint rationalization, expanded purchasing excellence and value engineering.

Our journey truly has just begun. Gentherm is perfectly positioned to capitalize on the future trends of automotive electrification, connected autonomous vehicles and the increasing demand for consumer comfort and wellness. We're creating an engine that will drive growth and we're poised to deliver on our 2021 objectives and beyond.

Now let's review some recent business highlights, beginning with [Slide 5] (corrected by company after the call) in our presentation deck. We're pleased that we were able to deliver 7.6% revenue growth in our core businesses, excluding assets held for sale, for full-year 2018, which was 60 basis points better than our plan. In addition, we delivered 1% organic growth in Automotive despite the challenging automotive production environment. We also continued to see momentum in market launches and 2018 marked a record number of automotive awards for Gentherm.

When looking specifically at the fourth quarter, we also delivered 1% organic growth in Automotive, significantly outperforming our key automotive markets. We saw continued revenue growth for our Climate Control Seat, or CCS, business, both sequentially and year-over-year. We also continued to make significant progress on our focused growth and margin expansion activities, and we're seeing positive results in our financials, particularly in our operating expense line items.

In 2018, we achieved an EBITDA margin rate of 14.1% in our core business, excluding assets held for sale.

Finally, we repurchased approximately $84 million of our shares during the fourth quarter, and we continued to repurchase more in early 2019 pursuant to a 10b5-1 plan. As of yesterday, we've repurchased a total of over $160 million in shares since launching our share repurchase program, and we have almost $140 million remaining in our current authorization. We recognize the value of our shares and will continue to evaluate and opportunistically deploy capital toward share repurchases, depending on market conditions.

Turning to Slide 6. The strong execution by our Automotive team continued in the fourth quarter with launches of systems on 17 different nameplate models across 13 OEMs. These figures incorporate the continued momentum we're seeing with our CCS product, with 9 launches that included the Chevrolet Blazer, Geely NL-5, Hyundai Santa Fe and Kia Telluride. Our systems were very well represented through vehicles that were highlighted at the Detroit Auto Show.

In January, we announced a strategic development partnership with Lear. The collaboration is for the advanced development of a highly integrated modular heat and cool solution for Lear's Intu seating system that will provide world-class passenger comfort. I'm excited that our teams will join forces to drive innovation in vehicle interior comfort solutions. This partnership is a great example of how our customers view us as the global leader in thermal comfort solutions.

Also, through our partnership with Rinspeed, we were able to proudly display our passenger thermal comfort expertise on the global stage of both CES and the Detroit Auto Show. Working with the Swiss-based think tank and mobility lab, we developed a personalized passenger thermal solution for Rinspeed's latest autonomous concept vehicle, the microSNAP. This concept vehicle is perfectly tailored to the autonomous, electrified and ridesharing ecosystem of the future. Customer feedback has been resoundingly positive. I know that many of you who attended either of these events got to experience those capabilities firsthand. I'm proud of our global team that worked hard to bring the Rinspeed project to life in a very short period of time. It's a true testament of the tremendous talent we have at Gentherm.

And finally, just last week, we announced a partnership with ThermoAnalytics, the leading thermal modeling software development firm. This partnership will enable Gentherm to improve the personalized thermal comfort experience provided through both our current CCS and our future ClimateSense solutions.

Now on to Slide 7, where you can see that we're continuing to win new business at a record pace. In the fourth quarter, we secured approximately $350 million in new program awards across 25 different customers. As I already mentioned, we secured $1.6 billion in new awards from OEMs for full-year 2018, surpassing our record of $1.2 billion in awards for full-year 2017 by 33%.

We won multiple CCS awards, including platform wins with Geely FS-11, Kia K5 and Kia Sorento, Land Rover Range Rover and Evoque, Nissan's C-CUV and the Volkswagen Golf. We received a follow-on award from Geely for our Air Cooling Battery Thermal Management system, beyond the 2 vehicles we were awarded in the second quarter of 2018. We continue to make progress on expanding our business with luxury German automakers. We won seat heating awards with the -- on the Mercedes EQS, a new electric vehicle based on the S-class platform, and on the BMW small car platform, including the X1, X2 and 2-Series Tourer. Finally, we were awarded the follow-on thermoelectric BTM business for Mercedes, which will extend this program through 2025. We're proud that our solution has proven to be such an integral part of their EQ Boost 48-volt mild hybrid system.

Now let's turn to Slide 8 for a discussion on our Industrial segment. In CSZ Medical, we saw continued growth in Blanketrol, our liquid-based patient thermal management solution, with several large orders from top U.S. integrated delivery networks, or IDNs. Blanketrol consistently ranks as a top 3 brand in patient temperature management globally, with a #2 rating in the U.S. and a #1 rating in the U.K. We're proud of this signature product.

We're seeing strong momentum in our international markets with 20% growth in Europe and 47% growth in Middle East and Africa. We also saw substantial orders from China and Japan in the quarter.

On the R&D front, we continue to investment in next-generation products and upgrade our existing portfolio with additional launches this year. One example - we're launching a digital upgrade kit to our Blanketrol product that will seamlessly connect to a hospital's electronic medical record system. Our Medical team continues to leverage the scale of our automotive engineering and sourcing to optimize design and secure lower component costs for our core medical products.

Let me summarize. While the challenges presented by the global auto industry persist, I'm pleased with the progress we continue to make. The momentum we're seeing in new automotive awards and our increased focus on margin position us well to achieve both our 2019 guidance and 2021 outlook. I remain proud of the hard work and commitment of the talented global Gentherm team.

With that, I'd like to formally introduce you to Matteo Anversa, our new CFO, and welcome him to the Gentherm team. Matteo joins us from Myers Industries, where he was CFO. He brings tremendous experience in the capital markets, including preparing Ferrari for its IPO, and financial discipline through detailed planning and analysis with his GE and Fiat Chrysler roots. Matteo, welcome aboard. I'll turn the call over to you for a little more color on the financial results.

Thank you, Phil, and thank you to everyone joining the call today. I am excited to be here, and I look forward to speaking and meeting many of you in the forthcoming future.

So first off, from Slide 9, I will focus my prepared remarks on the items that impacted our fourth quarter results. For the fourth quarter, our product revenues declined year-over-year by $3.5 million, or 1.4%. A 2% increase in the Automotive revenues was more than offset by a 26% decline in Industrial. If we adjust for the impact of FX and the Etratech acquisition, our overall organic revenue declined by 2%, with Automotive growing 1% and Industrial declining 26%.

The 1% organic growth in the Automotive segment was achieved despite a headwind in global vehicle production. According to IHS' latest data for our key markets of North America, Europe, China, Japan and Korea, light vehicle production in the fourth quarter declined almost 6% year-over-year. More significantly, this compares with the forecast back in mid-October of a relatively flat fourth quarter, which was a negative swing of approximately 600 basis points.

Our Automotive business outpaced the market as a result of new program launches and take rate improvement. The revenue increase in Automotive was driven by strength in our Climate Control Seat product line, which was up 5%, as well as Battery Thermal Management, which was up more than 3x year-over-year due to the new product launches that occurred throughout 2018. Steering wheel heaters were also a contributor with revenues up 3%. This revenue increase was partially offset by a 10% decline in seat heaters, primarily due to lower volume with European OEMs.

Etratech volumes were down 13% on a pro forma basis due to sedan platform cancellations with certain automotive OEMs, as well as a slowdown in the RV industry. Automotive cable revenues were down 13% due to a decline in orders from one of our large Tier 1 cable customers in Germany.

Moving to Industrial. In the Industrial segment, revenues declined by 26.4%. The CSZ Industrial Chambers business and GPT declined 3% and 58% respectively. Throughout 2018, we experienced declines in shipments of custom projects in GPT and custom climate testing chambers in CSZ industrial. Additionally, GPT experienced unusually high shipment volume in the fourth quarter of 2017, which makes it a difficult comparison.

As you may recall, we indicated in the past our intention to divest both of these businesses, and on February 1, we announced the successful disposition of the CSZ industrial test chambers business.

Industrial segment revenues were also impacted by an approximately 5% decline in Medical revenues, most of which was due to the timing of shipment, which shifted from December to January. For the full year 2018, Medical revenues were essentially flat. However, excluding the one-time benefit in 2017 related to a competitor's issue, Medical revenues would have grown 11%.

If we move to gross margin, gross margin for the quarter was 27%, a decrease of 300 basis points compared to the year-ago quarter, which was 30%. The decline in gross margin was primarily due to lower-than-expected sales volume, late-quarter Tier 1 customer order adjustments, higher labor costs and launch costs for the Battery Thermal Management unit.

In addition, we incurred higher freight cost, and we also had a negative impact coming from the tariffs. These were partially offset by cost reductions driven by our Fit-for-Growth initiatives.

The labor cost increases were mostly incurred at our production facilities in Mexico and Macedonia, where we increased our headcount due to higher expected production volume. However, the sudden decline in customer production volumes did not allow us to adjust headcount and other variable costs fast enough in a couple of the plants during the quarter. Additionally, in Mexico, we adjusted our wage rates to align with the competitive labor market conditions ahead of a new minimum wage requirement that is currently being implemented.

In BTM, we are still in the ramp-up phase of our production; therefore, we incurred high fixed costs and production expenses, which negatively impacted our gross margin.

On tariffs, while we were able to mitigate some of the impact as a result of the efforts of our sourcing team, the net negative impact in the quarter was approximately $800,000. And at this point, we still expect the annual impact of tariffs to be approximately $3 million to $5 million, as we previously indicated. In addition, we incurred premium freight due to some inefficiencies in Mexico as we ramped up our plant in Celaya., And these inefficiencies that impacted our fourth quarter results are currently being resolved.

If we move to operating expenses, operating expenses in the quarter were $47.6 million. This amount included approximately $1.9 million of restructuring charges related to the Fit-for-Growth initiatives. If we adjust for these restructuring charges, operating expenses were $45.8 million, down from $56.2 million in the fourth quarter of 2017 and $51.6 million in the third quarter of 2018. This year-over-year decline of nearly 19% was primarily driven by the impact of the Fit-for-Growth cost reduction initiatives and the nonrecurrence of $3.8 million in CEO transition expenses that occurred in the fourth quarter of last year.

It is also important to note that the fourth quarter of both 2017 and 2018 benefited from mark-to-market amounts in cash-settled stock options of approximately $2 million. In addition, the fourth quarter of 2018 also benefited from higher-than-normal R&D customer reimbursements of approximately $2 million. So if we take into account all these items that I just mentioned, the year-over-year decrease in operating expenses in the quarter was approximately 9%.

Our tax rate was 33.7% in the quarter, which was higher than our forecasted 25% due to lower income in jurisdictions with favorable tax rates and, as a result, our tax rate for the full year 2018 was 27.9%.

Finally, our adjusted EPS in the quarter was $0.50 per share, compared to $0.61 per share in the fourth quarter of last year.

If we move to Slide 10, I will review the balance sheet. So our cash position decreased during the year by $64 million. We actually generated $118 million in cash from operating activities, which helped us to partially offset a $148 million cash outlay for our share repurchase program. As a result, our net debt increased by $59 million, from $38 million at the end of 2017 to $97 million at the end of 2018. As of year-end 2018, the total debt stands at $139.9 million and our revolving line of credit availability stands at $222 million, which is pretty much flat year-over-year.

If we turn to Slide 11, I will provide you with an update on our guidance for '19 and the 2021 outlook. So if we start with 2019, we are projecting organic revenue growth to be in the range of 4% to 6%, excluding assets held for sale. We expect year-over-year revenue growth to gradually increase as the year progresses. And as we enter into the next phase of our Fit-for-Growth initiatives with more focus on the variable cost reduction, we expect our gross margin rate to gradually improve in '19 and to be in the range of 28% to 30% for the full year.

Operating expenses will be decreasing to 19% to 20% of revenue, mainly due to the impact of the Fit-for-Growth actions, and as a result, adjusted EBITDA margin will be in the range of 14% to 15%. We are also reaffirming our outlook for 2021 as shown on Slide 11.

With that, I'll turn the call back to Sherry to begin the Q&A session. Sherry?

(Operator Instructions)

Our first question is from Chris Van Horn with B. Riley FBR.

Looking at the 2019 guidance, could you give us some of your assumptions for underlying industry production, and then kind of the puts and takes of that 4% to 6%, how we think about that as the timing of launches or new business rolling on? And then on the same lines on the margin side, how much are you kind of -- you've identified $37 million and -- you've identified $65 million. You've had $37 million. Where are you kind of thinking about for the Fit-for-Growth contribution in terms of the margin range?

Sure, Chris. We'll start with the growth side. We're basically taking the best estimates we have through the February release of IHS data, which basically says flat year-over-year. And if you look at the trends throughout the year, the first couple quarters show a little bit more movement in the down direction and the last half comes back a little bit, so that's basically what we've got in the model and we're comfortable that we can achieve our results given those latest forecasts. In terms of our 4% to 6% growth, the lion's share is new launches, new vehicles, and will continue to grow with new technologies. Certainly our climate and comfort business continues to grow with share and take rate and new launches in that period. So we're pretty excited about that momentum heading in 2019. On the Fit-for-Growth side, clearly, we're moving pretty fast on the operating expense side of the equation, and we'll continue to see some momentum on that in 2019. We're shifting our focus now to the opportunities we've identified on the gross margin side, which, as you know, a significant part of our cost structure is in cost of goods sold. So we'll be looking at efficiencies. We'll look at our global footprint for manufacturing, and several other realignments there that we think will help us achieve those gross margin targets that we laid out going forward. So I think we're pretty comfortable in those, and obviously we're going to be really aggressive as we move forward.

Okay, got it. Thank you for that detail. And then just for a follow-on, a lot of new business seems like it's coming from CCS. And you saw some good top-line growth in the quarter from that business that, in the past, has kind of seen some challenges as people switch from various technologies. I'm just wondering if you could offer some commentary on how you see that business going forward. It seems like customers are shifting back, maybe, into more active cool, and just what you're seeing in the marketplace on the CCS side.

Sure. Oh, we're really proud of the growth we continue to see even in this tough market on the CCS side. It certainly speaks to the momentum we have. When you look at this -- at the technology movement, it's still definitely trending on the vent side, the CCS vent side, with wins and launches. But given the movement towards electrification and the focus on fuel efficiency, we're seeing lots of interest in active. And that's from customers in all regions. So we're continuing to announce wins on the active side and we're excited about continuing to inform you of those wins that will be coming, so. But that shift, really, towards active is going to be beyond the 2021 period as we start winning those awards.

Our next question is from Steve Dyer with Craig-Hallum Capital.

On the 4% to 6% product growth that you had outlined for 2019, are you able to or willing to break out sort of how it splits between the Medical business and the Auto business?

Well, we're not giving a ton of detail on that, but I would say that the Medical business is growing at a little faster rate relatively. But as you know, it's a very small business compared to the overall company.

Got it. And then looking forward to 2021 on the reiterated guidance there. Revenue growth of high-single digits organically would imply a pretty significant reacceleration in 2020 and 2021. Given sort of what we've seen from IHS ratcheting down their production estimates and so forth, what sort of gives you the confidence that you'll get that? If you're talking about sort of mid-single digits this year, it would imply double-digit organic growth in 2020 and 2021 to kind of get to those numbers. So is that sort of based on the design wins that you're seeing, or new wins, something like that? Maybe a little more color there would be great.

Sure, sure. Well, clearly, it's the win rate as we start layering in all these wins that we've been amassing over the last 2 years plays a big part of that, and that's across multiple technologies. CCS, of course, is a big part of that. We also continue to see growth in the Battery Thermal Management business. It's going to reach its higher run rate towards the end of 2019, so that'll play a big part of it. We also see pretty strong growth coming in the Medical business. So it's a combination of those 3 elements.

Okay. And then lastly from me, along those lines, you've just referred to Battery Thermal Management sort of reaching a run rate. I assume that's sort of based on those initial couple of design wins. Are you seeing sort of additional interest there? Would you expect to add more nameplates going forward?

Yes, definitely. On -- I mean, we have a host of technologies there. There's the Thermoelectric BTM that we're -- and we couldn't be more excited about our extension with Mercedes. I think that speaks to the value proposition of the product. So we certainly expect more from that product going forward. As I mentioned a couple quarters ago, we've got some development contracts that are under way. But on top of that, we've got some very interesting technologies around air cooling, we've got heating and we've got some cell-connecting product in that mix, so I think there's going to be a nice runway of growth in that whole business area.

Our next question is from Gary Prestopino with Barrington Research.

Phil, you mentioned some factors in looking at your gross margin going forward. Could we just revisit them, and maybe you could kind of rank order them in terms of where you see the biggest impact to gross margin betterment?

Yes, I'll let Matteo take that question.

So I would say, in order of importance, back to Phil's comment, I think the -- as we are shifting more attention of the Fit-for-Growth initiatives on the variable cost side, I think all the actions around improving our manufacturing footprint and efficiencies at the plants, the value engineering, reducing waste at the plants, that, I think, is going to be the bulk of where you see the gross margin improvements. In addition to this, I would say the continued work on the purchasing savings by achieving lower cost either through piece price reduction or rebates for our supplier - that would definitely rank the second. And then the rest.

And those are the actions, Gary. But if you look at the quarter, and the 27% versus kind of the normalized 30% from last year, it's really -- I would categorize it as 1/3, 2/3. About 1/3 of the gap was related to our operational issues, so some of the efficiency issues, one-time effects of expedited freight and the ramp-up of our Mexico plant. 2/3 was related to market factors such as -- obviously, in the fourth quarter, overall volume came in lower, and that affected everybody in our space. We also had a one-off effect of a steep decline in orders, our order cancellations, from a couple of European customers. One of them was this cable customer that dramatically cut our orders and left us really -- we had no time to really respond to that at the end of the quarter. Same thing on seat heat business towards the end of the quarter with the European customers. So that combination was about 2/3 of the problem we had in fourth quarter.

No, yes, or I guess what I'm getting at, obviously improving the footprint would be one thing, but in terms of some of these things like efficiencies, waste, are you -- have you been, like, applying Six Sigma principles at the plant, or is this something that you really are going to go full bore in? Because you can continually improve your gross margin if you get continually better at running your plants.

Yes, I think that's exactly right. As I mentioned, we focused most of the Year 1 Fit-for-Growth activities on operating expenses, kind of getting those back on track, and we're -- I think we're showing good progress there. And through the year we've identified opportunities with the gross margins, but now we're in a stage to really start the solid execution of those. And those fall into two buckets. The bigger bucket is more structural changes where most of the cost savings would come, whether that's footprint, rationalization, how we manage the network, make versus buy, that kind of thing. The maybe smaller bucket would be the in-plant efficiencies. We're really proud of our plants. I think they're -- it's a proven competitive advantage for us as a company in terms of our quality and the talent we have in the plants. So I think there's a really good culture of execution in the plants, and we'll just continue to go after that.

Okay, and then just a couple more here. In terms of Cincinnati Sub-Zero, I went through the press release; I didn't see it here. What is the annualized revenue of the Medical business at this point? Can you make that public?

It's in the neighborhood of $30 million.

Okay, so Medical's $30 million, okay. So and your guidance is really pegged off of the Auto business, the Medical, but you're not -- there's nothing in there -- we should not consider anything for remote power generation? Just kind of treat that as a discontinued op as we put our numbers together?

Yes, yes. GPT and CSZ industrial chambers are both taken out of that altogether.

Okay, that's fine. And then lastly, I mean, is -- at the Auto Show, plenty of SUVs, crossovers and all that. I mean, are you still seeing that as these -- as we transition away from sedans into these light trucks and all that, that there's more of an appetite for your CCS products in steering wheel heaters, things like that?

Yes, I think that's true. We -- generally on the trucks and SUVs, we have a little bit higher take rate than -- it seems like the OEMs are competing more and more on these comfort convenience features in the vehicle, so we're -- we definitely see that trend. We are facing the challenge of roll-offs of sedans, though. I mean, those -- that's certainly -- those announcements by some of the big players has a negative effect in the short run, and we're hopeful that the SUV and truck market can continue to overcome that. But certainly that's been a factor, and it will continue to be a factor in the next year as end of production comes on some of these vehicles.

Our next question is from Ryan Brinkman with JP Morgan.

What is your expectation for the China market this year? What is the latest you're seeing on the ground there in terms of demand for the vehicles you supply? And then anything that might be happening with your take rate there? And also, if you could just remind us of your revenue exposure and who your biggest customers are in China.

Most of our -- yes, I mean, we've definitely got growth in China in 2019, and a lot of that is coming from -- well, it's coming from 2 places. We still have growth in penetration rates with our international OEMs that are operating in JVs in China. And then we're going to be launching several programs with domestic OEMs such as Geely and Great Wall and GAC as we roll into the new year. The China market is now about $100 million-ish in revenue, and -- but we see that as significant upside in the years ahead. But certainly the bulk of the growth is going to come more in the out years as we win more vehicles and see take rates pick up.

I see, that's helpful. Thank you. And then, how should we regard the lower R&D in 4Q? How much of this was due to the higher-than-normal level of customer reimbursements, which I would think is probably more of a timing-related issue versus how much is coming from, maybe, your efforts to better focus the business and tie R&D to revenue-generating activities, the benefits for which, I imagine, would carry forward better? And do you have an outlook for R&D that you can share?

Yes, it's definitely coming down, net-net coming down. We did see a little more decline in the quarter given the higher reimbursements, but we'll definitely see it on a normalized basis coming down from 19% to 18%, and that's built into our OpEx target that we put out there, the, I think, 19% to 20%. That said, we're -- in the 4 key areas of growth, we are adding resources, and we're funneling more into those areas that will offset some of the savings. So for example, the Battery Thermal Management business, our new ClimateSense solution, certainly on the Medical side, those areas are getting some reinforcements in terms of R&D expertise.

Okay, thanks. And then, and last question, have you done any work to try to understand the potential impact of Section 232 to your business, if those tariffs were to be extended from steel and aluminum to also include autos and auto parts? And perhaps while answering that you could give us an update on the Section 301, your efforts there to try to mitigate some of the impact of those tariffs to your margin.

Well, I think if you look at our estimate of $3 million to $5 million, it captures everything we see right now, that we know about. And well, we're still working to offset those. I think the team has done a good job. If you look at our previous estimate, it was -- we originally expected to have double that impact in 2019. So we're really happy with what we've already mitigated through supplier changes, supplier location changes and even some of our own internal manufacturing locations. We'll continue to work on that. We've got some other ideas in the hopper. But as you know, in Automotive, making design changes and supplier changes takes time. You have to go through qualifications. You have to get approvals for customers and the like. So I think we feel comfortable with the $3 million to $5 million at this point.

Our next question is from Matt Koranda with Roth Capital.

Just in terms of the question in regards to one you answered earlier, Phil, I think you mentioned that the take rate is growing this year for you guys. Just wanted to clarify. Do you mean you're seeing a mix tailwind in 2019 as OEMs produce more high-trim vehicles with your content? Or is CCS just being put down into kind of the mid-trim-level vehicles?

It's a combination. We're seeing current vehicles that we're on apply the technology at a higher take rate, so just the market take rate going up. We're also seeing adoption rate, so vehicles that in the past haven't had the technology are now launching with it. And by the way, this applies to the CCS, heat, steering wheel; I'd kind of lump all that together. But certainly -- and then on top of that you add increased content in the specific vehicle. So rear seats, it's -- we're seeing rear seats with heat. We're seeing rear seats with full CCS, both passive -- or both vent and active. And so all those things are kind of coming together to drive up take rate. And we're even seeing it surprisingly, in the large SUVs, we're seeing it in the third row.

Very interesting. And then in terms of gross margins, you mentioned, I think, that 2/3 of the issue with gross margins was essentially sort of the end-of-quarter adjustment that you saw from some customers. Was the Battery Thermal Management launch sort of the balance of that headwind, or were there additional headwinds in the quarter there?

That was in the 1/3.

Yes.

Sorry, go ahead, Matteo. You want to give that (inaudible)?

So the battery -- the impact of the battery thermal launch was about 60 basis points. And then the tariffs and the freight make the rest. Sorry.

Okay, no, that's helpful. And then assuming that that launch essentially goes to plan toward the back half of the year, that then becomes a tailwind. Is that embedded in the gross margin outlook sort of at the midpoint, or is that sort of what gets you to, maybe, the higher end of the range that you highlighted?

I think there is -- we're expecting the margin on the BTM to improve, and -- but I would still say that the gross margin of BTM in '19 will still be dilutive compared to the total company. That's the way I would portray it.

Okay. And then in the Fit-for-Growth actions and sort of the longer-term gross margin improvement actions, you guys did highlight footprint actions a fair bit in your commentary today. Just wondering, I mean, timing wise, when do we sort of have to see those additional announcements around footprint action for some of the footprint stuff to take hold by 2021? I mean, I would assume we're going to need to see it by the middle point of this year at the very least, just to start to see that kind of flow through to the gross margin improvement. Is that fair?

Yes, definitely. We'll be announcing this year and start working on those adjustments this year.

Okay, got it. And I hate OpEx questions, but I have to ask one more. So the 18% to 20% that you guys highlighted implies about $200 million of annualized OpEx. But I guess even if I annualize sort of what you did in Q4 and I ex out sort of the one-time R&D reimbursement stuff that you got, it still sort of puts me in the $190 [million] range. So any help there in terms of the gap?

Yes, I think we're going to keep prudently investing in R&D. That's -- that'll be your delta. As I mentioned, we're -- our strategy is focused growth, and we've got to -- we have to invest in those technologies. Our -- the core of our company is competing on technology and innovation. That's what we're all about, and we're really going to prudently portion resources into those growth areas.

(Operator Instructions)

Our next question is from Anthony Deem with Longbow Research.

So a few from me. It sounds like all this Fit-for-Growth operating cost benefit is mostly included in the 2019 guidance. If that's the case, we're looking at a 300 to 400 basis-point improvement expected for 2020 to 2021 operating expenses as a percentage of revenue, right?

Yes.

So I'm just wondering if this is simply accomplished by excluding GPT? Is it a restructuring payback timing issue or is this guidance for the 300 to 400 basis-point improvement. Is that based primarily on leverage on higher revenues? I think that was about 100, 150 basis points before in the bridge to the lower operating expenses. So just kind of wondering if you can dimension those issues, and if that is the case, what's driving it?

Yes, sure. So I think I would say it's a -- the major one is definitely the work on the continued actions on Fit-for-Growth. I would also say that we are assuming at least 1 point, 1.5 points of fixed gross[inaudible] leverage thanks to the revenue increase, so that's how I would portray it.

Okay, got you. So Fit-for-Growth benefits coming past 2019, in addition to the operating leverage. Okay. So with that said for the leverage, 2018 to '21 guidance, can you just be more specific around the high-single-digit Auto growth? Does high-single digit mean 7%, or does it mean 9%? Because we can make some very different assumptions there. And also, I'm also wondering on top of that, for that high-single digit product growth guidance, does that include the up 5 with Etratech in '18 or does it use your adjusted decline of 1% in 2018?

Okay, so the growth is high-single digits; I think that's what we're willing to share at this point in time. And it's a combination of what I mentioned earlier. We see higher growth in the climate and comfort business, for sure, in that period of time, through take rates and starting to roll out the new awards, with our record backlog. That's going to start having an effect in those years. And clearly, the BTM business is going to pick up the pace, and we're expecting a fair amount of growth as compared to 2018 in that regard. And then Medical, Medical is -- we're expecting to double the business, basically, in Medical between '18 and '21. All those things are net of the businesses we're exiting, of course, so the starting point is kind of what we're laying out as the net result of 2018 after assets that were either divested or held for sale.

Got you. Are you able to sort of break out contributions between those 3 in terms of the win rate, the higher BTM run rate and the Medical? I think we can back into the Medical, so I'm just interested in contribution. Or is it pretty evenly split?

Oh, on the dollar value, it's going to be higher in the climate and comfort business, so the core business. As a percentage -- on a percentage growth basis, certainly higher in BTM than Medical.

Yes, that makes sense. And then just last question from me. The Lear Intu seat -- so congrats on this collaboration pair. So this is one area Lear looks to accelerate their growth, certainly. They highlight how this seat can help set, I think, high, medium, low temperatures, kind of like a thermostat. I'm just wondering, do you see this seat option as a luxury product with a few customers? Or in your opinion, does it really have mass-market potential? And thanks for taking my questions.

Yes, I mean, it's -- that's probably a detail I can't give because that's a Lear project, but I think certainly the idea behind it is that it is modular and something that can be efficiently integrated into the seat design. So it's certainly not meant to be something that only would be used on the highest of high end.

Our next question is from Richard Carlson with BMO Capital Markets.

So Phil, you talked a little bit about BTM, and I hoped you'd maybe dig in a little bit more, because you're -- it sounds like you're being very successful with those wins and it's going to be, probably, a pretty big part of your growth story the next couple years. So with the add-on from Mercedes, I think in the past you've shared kind of what you expected just from the current wins, what the revenue would be once you fully ramped. Are you willing to give us some numbers on that? And then talk about the number of maybe how big the pipeline is for that currently?

Yes. I think in general, if you look between 2018 and 2021, our expectation is, on a dollar basis, to grow somewhere between $80 million and $100 million. And that's a combination of all the different product lines.

Got it, awesome. All right. So that's certainly pretty substantial growth. And so are you hearing anything different from your customers? Because certainly the expectation is that, especially with the 48-volt, that's going to go from a pretty low penetration currently to a pretty substantial size. Are you hearing anything different with that?

No. I think the estimates are still pretty solid based on where we've built our plans. And if you look at our solution set right now, that's the lion's share of the BTM business we have, whether it's the thermoelectric-based or air-cooling, is really growing fastest in that 48 mild -- 48-volt mild hybrid space. So that's certainly what we expect to be the largest market through 2025.

Right. And what's your regional concentration for that business? I assume -- is it mostly Europe and China?

Yes, right now it is mostly Europe and China. Of course, we have the 1 program in the U.S. with FCA, but -- and we're seeing some other opportunities start to come in, but right now most of the shipments are Europe and China.

Thank you for that. And then just one last modeling question. So your tax rate of 28% to 30%, of course, is much higher than what you've shown over the past couple of years. Is that just a GAAP number, and there'll be -- it'll end up being lower on an adjusted basis?

We are -- for 2019, if that's the question, we are expecting 28% to 30%. It's going to be a couple of points higher than what we experienced in '18 because in '18 we enjoyed some favorable tax rates on intercompany transactions that we're not expecting to occur again in '19, and that's the reason for the increase.

Got it. And then, so that should be what we should think about going forward as well, for the out years?

For now, that's what I would use.

Ladies and gentlemen, we have reached the end of our question-and-answer session. I would like to turn the call back over to Mr. Eyler for closing remarks.

Great. Well, thanks, everyone, for joining our call today. As I said in my opening comments, we remain focused on execution, innovation and cost improvement. Just to briefly recap what you've heard today, 2018 was really a transformative year for Gentherm. We clarified our mission and strengthened our leadership team. We designed, developed and continue to implement a strong strategic plan to drive focused growth. And it's already achieving early returns.

Today, Gentherm really is perfectly positioned to capitalize on the emerging trends in the automotive industry - electrification, connected and autonomous vehicles and consumer demand for comfort and convenience. I'm confident that we'll continue to deliver significant shareholder value in the quarters and years ahead.

I appreciate your interest and support, and we look forward to keeping you appraised of our progress. Thank you.

Thank you. This concludes today's conference. You may disconnect your lines at this time, and thank you for your participation.